Why China's money matters to you
United States Treasury Secretary John Snow held a major news conference at 4:30 p.m. last Wednesday, available live on the Web. It was probably watched in financial circles around the world. At 4:45 p.m., Sens. Charles Schumer (D) of New York and Lindsey Graham (R) of South Carolina commented on Capitol Hill.
That's the way big news gets out in Washington nowadays. The news: China was again not declared to be "manipulating" the value of its currency, the yuan.
It may sound obscure. But it isn't. Because China has become such a key player in the world economy, its foreign-exchange policy affects anyone who goes shopping in this country - and many more consumers around the world.
The news was kept super secret. An advance leak might have given speculators in the massive foreign-exchange market a lucrative advantage.
At stake, should the repercussions of China's policy be negative, is the possibility of a global recession, warns Ben Carliner, research director of the Economic Strategy Institute, a think tank in Washington, D.C.
He fears that the Bush administration's failure to name China as a currency manipulator under the 1988 Trade Act will prompt rising protectionism in the United States.
Up to now, the US has been engaged in a "good cop, bad cop" routine with China, Mr. Carliner suspects. Wanting to avert a trade war, the administration has been urging the Chinese to revalue its currency for at least three years. Secretary Snow did say he was "extremely dissatisfied" with the progress China has made in this direction. Had Snow pulled the trigger on the "manipulation" gun, it could have opened the door for a review by the International Monetary Fund and congressional action.
Last July, China let the yuan rise in value a tiny amount, from 8.28 per US dollar to 8.11. It's at about 8 per dollar now. China's exchange rate is fixed by the central Peoples Bank of China against a basket of currencies.
But some economists figure a 15 to 40 percent upgrading of the yuan is necessary to correct the massive trade imbalance between the US and China.
China's currency-market intervention creates, in effect, a 33 percent subsidy for Chinese exports, calculates Peter Morici, a former chief economist of the US International Trade Commission who is now at the University of Maryland. "If that is not an unfair competitive advantage in trade, one must wonder what would qualify as such in the minds of US Treasury officials," he states.
Senators Schumer and Graham have proposed a bill that would require the administration to enter into negotiations with China for revaluation. If nothing ensues by the end of two years, the US would impose a 27.5 percent tariff on all Chinese imports. Last year, a procedural vote dealing with this bill got 63 yeas - enough to override a Bush veto.
"Our legislation may be the only way to get China to play fair in the global marketplace," Schumer stated.
Even if China decided to voluntarily revalue its currency by 20 percent, that would lead to other problems. It could push up the price of Chinese goods at Wal-Mart by a proportionate amount. Other Far East nations, such as Taiwan, Singapore, Thailand, and South Korea might let their currencies rise to get better prices for their exports.
Some economists worry that a stronger yuan would revive inflation in the US, prompting the Federal Reserve to raise short-term interest rates above the 5 percent level reached last week. And long-term mortgage rates would follow, sending the housing market downward.
On the positive side, more expensive Chinese goods could stimulate "a renaissance" in US manufacturing, notes Mr. Morici. An upturn in manufacturing would provide more well-paying jobs for Americans, boosting US living standards.
Mr. Carliner dubs the Chinese control of its currency value "protectionism."
Over the past 15 years, the US has bought $1.1 trillion more in Chinese merchandise than it has sold of American goods to China.
The result is that China, by the end of this year, will have socked away $1 trillion in US Treasury securities in its international reserves as a byproduct of keeping down the value of the yuan. Last year alone, the US had a record trade deficit with China of $202 billion.
Some $47 billion of that deficit, notes Washington economic consultant Charles McMillion, was in "advanced technology products." In other words, China isn't just making sweatshirts, toys, and electronic products for sale to the US.
Many economists worry that China and other Asian nations with huge hoards of US securities could decide to dump them. That could knock the dollar for a loop, raise US interest rates, pop the housing bubble, and cause a recession. Many nations in Europe and elsewhere have been relying considerably on sales to the US for their own prosperity.
To proponents of yuan revaluation, this change would be good for China. It would, Morici says, encourage rural and domestic development where it is sorely needed and dampen the excessive boom in cities where most exports are made.
In its new five-year plan, China has stated its intent to encourage just that.